What is condo insurance and what does it cover?

Condo insurance is a home insurance policy that covers your personal property and any part of the building for which you're responsible, as well as providing you with liability coverage.  Your HOA has a master policy that protects common areas, structures, and some parts of your condo but has no personal coverage for you.

Condo owners, or HO-6, insurance picks up where the HOA policy leaves off and provides personal coverage for you and your family. That includes coverage for any part of the building not covered by the master policy, contents and personal liability. The type of policy you need will affect the cost of condo insurance.

Finding the right condo insurance policy requires a little research. Read on to learn the basics of condo coverage and how the different policies work.

What does HO-6 condo insurance cover?

The HO-6 policy offers a range of coverage:

• Building property (dwelling)
• Personal property (contents)
• Personal liability
• Loss assessment
• Master policy deductible
• Loss of use (additional living expenses)
• Medical payments

All of these coverages are much the same across HO-6 policies, except building property coverage. How much building property coverage you need and what is covered depends on the HOA policy.

We’ll take a detailed look at each of the parts of a condo policy and what they cover below.

Building property (dwelling) coverage

This coverage is required if you are responsible for any part of the building itself or anything attached to it. What you need to cover will depend on what’s not covered by your HOA master policy.

It’s vital to read your master policy carefully to know how much dwelling coverage you need for your condo. You may not need building property coverage if your master policy covers all parts of your unit that aren’t your personal property. On the other hand, you may need dwelling coverage for everything from the walls in.

Building property coverage protects things like:

• Light fixtures
• Countertops
• Bathroom fixtures
• Built-in appliances
• Doors
• Cabinets

Personal property (contents) coverage

Personal property coverage applies to everything in your unit that is not a fixture. This means electronics, toys, furniture, décor, clothing, books, kitchen equipment and anything else you own. Like homeowners insurance, HO-6 personal property coverage applies to your belongings at home and outside your home on a more limited basis.

Off-premises coverage for damaged or stolen items is limited to a percentage of your total personal property coverage, usually 10%.

Unlike homeowners insurance policies, standard HO-6 coverage for personal property is not a percentage of the dwelling coverage (since there is no dwelling coverage). It's usually a flat amount that you will need to calculate. Make sure you have included all of your possessions, from kitchen gadgets to bathroom towels, in your calculation.

There are two types of personal property coverage: replacement cost and actual cash value. Replacement cost pays the actual cost to replace each item at today’s prices. On the other hand, actual cash value will only pay the item's depreciated value. Adding replacement cost coverage is always a good idea, as items depreciate quickly.

Note that special limits exist on high-value items like jewelry, art, or musical instruments. You can add additional coverage for these items or add what’s known as a floater or a rider. Scheduled property floaters insure specific items for their appraised value.

Personal liability coverage

Your HOA's liability insurance only applies if a visitor or resident is injured in the project's common areas – like elevators, pathways, swimming pools, and clubhouses. Personal liability insurance provided by an HO-6 policy protects you and covered household members when you're responsible for bodily injury or property damage to others.

In addition to paying settlements to injured parties, HO-6 insurance covers the cost of defending you from lawsuits. It works both in your home and off the condo premises.

Condo liability coverage limits typically run between $100,000 and $500,000. How much liability insurance do you need for a condo? Experts offer a few ways to calculate it.

One is taking the value of your assets plus five times your annual income – you're protecting everything you own plus your future income. You can purchase a personal umbrella (excess liability) policy for more protection.

In many cases, you must have at least $300,000 in liability coverage on the underlying policy before insurers will sell you an umbrella policy. Some companies will require that you carry the maximum available, which is a good idea if you need extra liability.

Loss assessment coverage

Loss assessment coverage kicks in when a covered peril causes an assessment -- for example, a huge storm destroys the roof of the entire building, exceeding the HOA's insurance limits and sticking your community with a giant repair bill. Every condo owner is responsible for a share of the cost, and loss assessment coverage will kick in to help pay your part.

Experts recommend at least $50,000 of coverage, while the standard HO-6 comes with much less – often just $1,000. Note that this coverage only applies to covered perils. If the assessment results from an earthquake, and there is no earthquake insurance in force, you won't be protected.

Master policy deductible coverage

HOAs increasingly choose higher deductibles for their master policies, reducing their premiums while upping the risk to individual owners. Industry insiders have noted that deductibles over $10,000 are not rare, and for some complexes have climbed as high as $50,000.

Master policy deductible coverage reimburses unit owners for these deductibles. You should ensure this coverage equals your master policy deductible to avoid unexpected losses. By reading the policy carefully, you'll better understand how you’ll be reimbursed.

Loss of use (additional living expenses) coverage 

Loss of use coverage kicks in when your unit becomes uninhabitable due to a covered event. During repairs, this coverage will pay for things like a hotel room, food and other costs incurred while you can’t be in your home.

Medical payments

Medical payments coverage pays for medical costs if someone is hurt at your home. For example, if a friend slips on your rug and breaks an ankle, your medical payments insurance can cover the ER bill. This is usually between $1,000 and $5,000 and is designed to cover smaller medical bills.

What does a condo homeowners association master policy cover?

The condominium master policy doesn’t have a lot of requirements, and coverage can vary. HOA coverage must address just two basic items:

• General liability for the association
• Property damage coverage for the common areas

In addition to the basics, HOAs can add personal liability insurance for board members, coverage for damage related to sewer and drain backups and insurance against theft of HOA funds. None of this protects you as an individual property owner, however. The HOA's liability coverage applies if someone slips and falls in the community parking lot. But if they fall in your bathroom, the HOA is not responsible.

There are three levels of coverage an HOA can choose:

• "Bare walls" coverage is limited to the basic structure of the building, including fixtures and furnishings collectively used. That means items for your exclusive use, like counters, cabinetry, flooring, sinks, etc., are not covered. Neither are upgrades and improvements added by you or a previous owner. Your personal property (anything you own that's not nailed down) is also not covered.
• "Single entity" policies usually cover the building structures, common areas, and fixtures in individual units, but not personal property or improvements made by you or a previous owner. Your personal stuff and any upgrades you have made to the interior are not covered.
• "All-in" or "all-inclusive" policies cover the structure plus fixtures in individual units and additional upgrades you or a previous owner made. This policy includes full restoration of your unit to its condition immediately prior to a covered catastrophic loss. The only items not covered by an all-in master policy are your personal belongings.

Master policies don't usually provide liability coverage or insure the personal property of individual owners. In addition, master policies usually have a deductible, which is passed onto HOA members in the event of a loss.

To plug the gaps in your HOA's master policy, you'll have to purchase HO-6 home and contents insurance.

What perils are covered by condo insurance?

Most condo policies are open perils, which means they cover damage from all perils with the exception of those that are specifically excluded. Common covered perils include:

• Fire
• Theft
• Vandalism
• Storms and lightning
• Falling objects
• Water damage from sudden and accidental discharge

Check your policy for specifics.

What's not covered by condo insurance?

Perils excluded under a standard condo insurance policy include damage from floods, earthquakes, sewer backups, and (in some locales) hurricanes. Coverage for these can be purchased either as an endorsement or as a separate policy.

Earthquake

If you want to buy earthquake insurance for your unit, and your HOA has not bought earthquake coverage for the buildings, many insurers won't issue you an individual policy.

In states like California, however, if a company sells condo insurance to unit owners, it must offer earthquake coverage. The downside is that if you have earthquake insurance but your HOA does not, your interior is covered, but the building is not.

Flood

If your condo is in a Special Flood Hazard Area (SFHA), and you have a mortgage, you'll be required to have flood insurance on your unit. However, even if you're not required to have flood insurance, you might want the extra protection. The National Flood Insurance Program says that homeowners outside high-risk areas file over 25% of NFIP claims and receive one-third of flood disaster assistance.

Wind and hurricane

Coverage for wind and hurricane damage is included in most HO-6 policies, but it can differ depending on the area in which you live. You may be able to exclude this coverage for a lower insurance rate, but it’s risky.

In Alabama, Connecticut, Delaware, Florida, Georgia, Hawaii, Louisiana, Maine, Maryland, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Texas, Virginia, and Washington D.C., insurers have begun reducing their exposure to catastrophic losses from storms and hurricanes by selling homeowners insurance policies with special deductibles for storm damage.

How do they work? They carry percentage deductibles instead of flat dollar amounts – based on the home's insured value. If your condo is insured for $200,000, and your policy has a 5% deductible for hurricane or storm damage, you're responsible for the first $10,000. For an additional premium, you may be able to choose a traditional flat deductible.

Sewer backups

One peril not covered by standard policies is damage from sewer system backups. You can add sewer backup coverage to your policy as an endorsement, even if your HOA does not have this coverage. It will protect your personal property and building property as well.

How much condo insurance do you need?

If your master policy, like most, is "bare walls," you'll need to cover rebuilding costs for the interior of the condo. If you have a recent home appraisal, it will give you an idea of what it would cost to rebuild your unit "good as new." An agent familiar with local building costs can give you a per-square-foot figure, or you could have a contractor provide an estimate (rebuilding appraisals cost about $300).

Next, you'll choose the amount of personal liability coverage. Use whatever rule you like – net worth, total assets, total assets plus five times income – and add an umbrella policy if needed.

Add coverage equal to your master policy deductible if the standard HO6 doesn't cover it. Add loss assessment coverage – experts recommend $50,000 worth.

Take an inventory of your personal property. An easy approach is to use the square footage method -- assume $40,000 of belongings for the first 1,000 square feet and add $10 for every additional square foot. Add coverage for excluded or limited property if needed.

Add earthquake, flood, and sewer coverage if you don't want to assume the risk yourself.

Condo insurance requirements and your mortgage

Until recently, mortgage lenders did not require condo owners to carry insurance as long as there was an HOA master policy in place.

Requiring borrowers to insure their condo units reduces the risk of financial ruin for them and mortgage default for their lenders.

Fannie Mae, which buys the majority of non-government mortgages in the U.S., requires HO-6 insurance "covering personal property, personal liability, and the physical unit from the studs in, unless the lender can document that the association's master policy provides the same interior unit coverage." The minimum coverage allowed is 20% of the unit's appraised value, with a maximum 5% deductible. If you buy a $200,000 condo, then, you need at least $40,000 of insurance with a maximum $2,000 deductible.

HO-6 coverage is also required for FHA and VA home loans when the master policy does not include interior unit coverage.

How to buy condo insurance

Purchasing condo insurance is a little different from buying standard homeowners insurance. When you buy a homeowners insurance policy, you insure the value of the dwelling – either its cash value or replacement cost – and your personal property (contents) coverage is calculated at some percentage of the home's insured value. You can then add special "floaters," endorsements– or riders to increase protection – and include coverage for excluded perils like flooding and earthquakes.

One challenge of condominium insurance is that owners may have to comb through the association documents and the master policy to see where the holes are. Master policies are not "one size fits all," and neither is HO-6 insurance. Here are the steps you'd take to determine your coverage.

• Check your master policy to see if it's all-in, bare walls, or single entity.
• Determine your liability coverage needed.
• Calculate the value of your personal property and see if you need floaters.
• Determine your building property coverage amount if the master policy is not all-in.
• Choose replacement value or actual cash value reimbursement.
• Decide if you want flood, earthquake, or sewer backup coverage.
• Check your condo documents and add extra master policy deductible and special assessment coverage if needed.
• Make a list of coverage you need and shop among competing providers. Make sure you ask about discounts.

The average condo insurance cost is $625 a year. That’s for $60,000 in personal property coverage, $300,000 in liability, and a $1,000 deductible. If you need more or less coverage, your rates will vary.

Is HO-6 insurance worth it?

Regardless of the amount of coverage you choose to purchase, the protection condo insurance provides makes condominium insurance a smart buy and a good investment. And, in some cases, it may be a requirement. Owning a condo is like owning a home in that it is one of the largest investments you'll make in your lifetime. It is a wise decision to protect that investment.